In Focus: Player acquisitions and accounting rules

The domestic transfer market recently closed for English Premier League clubs and some fans will be fairly happy with their club’s summer business, while others, to the contrary, will not.

Player investment is seen by fans as an indication of intent on the part of the board of directors, who serve the owners of the club. Some clubs’ player investment strategies are clear to see, in terms of the profile of players acquired over a period of time. Broadly speaking some clubs will be active in the transfer market, while others may not. One of the main reasons for this is purely down to the financial resources available to the club.

When clubs buy and sell players within the transfer window it can have a significant impact on the on-field performance, which fans monitor very intently. However, the question that needs to be asked is what impact will it have on the club’s finances?

In most cases, transfers will represent either cash leaving the club in the case of a player being acquired, or the club receiving cash in the case of a player sale. The accounting system used by clubs will take account of these cash movements depending on the transactions adopted by them.

As players move from club to club so do their player registrations, which in the case of an acquiring club, gives them the right to utilise the services of the player over the length of their contract. Having this right represents an asset to the club and thus must be recognised in the club’s accounting records. In addition, what must also be noted, is this ‘right’ would be seen as an intangible asset – an asset which has no physical substance, unlike club property such as a stadium, vehicles, lighting rigs, etc.

When recording transactions for any business, football clubs included, accountants follow principles and standards/rules which facilitate consistency of treatment among all organisations. The relevant standard to be followed when dealing with player registration rights would be: International Accounting Standard 38 – Intangible Assets, for clubs using International Accounting Standards; and FRS 102 – The Financial Reporting Standard applicable in the UK and Republic of Ireland for clubs using UK standards. According to both standards, where an asset has been acquired it must be recognised, assuming the following criteria have been met:

“It is probable that the future economic benefits that are attributable to the asset will flow to the entity; and the cost of the asset can be measured reliably”. (IAS 38 & FRS 102)

When clubs buy players on the transfer market, it is expected that the club will benefit from the player being in the team from an economic perspective and the cost of the player can be reliably measured. What this means is that the transfer fee paid by the club is recognised as an intangible asset which is listed as one of the assets of the club within the accounting records, and ultimately in the published financial statements at the end of the financial year.

To reflect the fact that the players’ services are being used for a period of time (based on the contract), the initial cost of the player (transfer fee) will be written down by a pre-determined amount each year – this is required by the above standards, and is purely an accounting entry i.e. it has no cash consequences for the club.

This writing down of the initial cost of the asset in this way is known as amortisation. Annual amortisation reduces the value (accounting value/book value) of the players’ contract within the end-of-year financial statements.

These amortisation costs are seen as an annual expense, like the wages paid to players and thus can be identified in the clubs’ year-end financial statements. Specifically, these costs will feature in the income statement of the club whose main purpose is to assess whether the club has made a profit or loss on its operations over the previous 12 months.

The above accounting treatment allows clubs a better chance of meeting Financial Fair Play Regulations when it comes to the break-even requirements. The transfer fee costs are spread over the term of the players’ contract via yearly amortisation charges, rather than charging the entire cost in the year of the transfer.